Tax consequences can make all the difference between a profitable and unprofitable year for many small businesses. As a business owner, the last thing you want to do is pay Uncle Sam more money than is extremely necessary. If you want to lower your tax burden this year, the strategies listed below will assist you.
Focus on business objectives
Effective tax-cutting strategies help business owners save a lot of money. However, obsessing over tax issues can be harmful if it leads to poor business practices or a lack of focus on a company’s core objectives. For example, forming a company in a state with preferable corporate taxes only to discover that cost of labor are twice the average can cause more harm than good. Decisions aimed at obtaining advantageous tax treatment should also be economically rational.
Register as a limited liability company
Small businesses frequently believe they are too “small” to incorporate, but this could not have been further from the truth. Every company, large or small, must establish a legal corporate structure that corresponds to their business requirements, goals, and business strategy. An LLC is intended to limit the owner’s personal debts of the business, whereas a sole proprietorship provides less protection because there is no legal separation between the owner and the business. Running a small business as an LLC can result in lower self-employment tax among other tax advantages.
Investing in a retirement account is one of the most proactive tax-saving methods available to potential owners today. A retirement account, unlike other investments, allows taxpayers to claim a deduction without losing money spent to qualify for the benefit. Typically, the funds must be held in the account for a set period of time, but all earnings accrued in a retirement savings plan are tax-deferred until withdrawn.
There is a home office deduction for home-based businesses that can provide significant tax cost saving irrespective of whether the home is leased or owned. A percentage of general maintenance and repairs, energy bills, internet, as well as other expenses can be deducted based on how much space the office occupies. The Law demands that any room claimed as an office space be used for work – related practices on a regular and exclusive basis. For instance, if kids watch TV in the same room where an office is located, the space is not eligible for the home office deduction. Moreover, this tax benefit is only available if the property is the primary location of the business. Keep in mind, however, that if the home office is the primary work space, business can be carried outside the home but still qualify for the deduction.